Is Steven Madden Ltd’s (NASDAQ:SHOO) PE Ratio A Signal To Buy For Investors?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Steven Madden Ltd (NASDAQ:SHOO) trades with a trailing P/E of 24x, which is lower than the industry average of 24.8x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.
View our latest analysis for Steven Madden
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for SHOO
Price-Earnings Ratio = Price per share ÷ Earnings per share
SHOO Price-Earnings Ratio = $56.9 ÷ $2.375 = 24x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to SHOO, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. SHOO’s P/E of 24x is lower than its industry peers (24.8x), which implies that each dollar of SHOO’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 25 Luxury companies in US including Kingold Jewelry, Vince Holding and Ever-Glory International Group. As such, our analysis shows that SHOO represents an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy SHOO, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to SHOO, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with SHOO, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing SHOO to are fairly valued by the market. If this does not hold, there is a possibility that SHOO’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to SHOO. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for SHOO’s future growth? Take a look at our free research report of analyst consensus for SHOO’s outlook.
Past Track Record: Has SHOO been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of SHOO’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
